Digital services company Webcentral (ASX: WCG) has pulled off a substantial M&A coup having secured an agreement to sell two-thirds of its domains business for $165 million. Making the deal most remarkable is the fact Webcentral was trading with a market cap of just $36 million ($0.11 per share) prior to the deal being formalised.  

The binding sale agreement is with an investment group based in Europe, led by Oakley Capital and its partners. It entails the sale of two-thirds of its Webcentral and Melbourne IT domain name registry, consumer hosting (cPanel hosting), and email hosting services business, collectively known as the “Domains Business.” The total transaction value is set at $165 million, with net cash proceeds of A$115 million and a net cash position of A$84 million after debt repayment and transaction costs.

The transaction with Oakley Capital was considered the most advantageous move to maximise the value of Webcentral’s assets following a comprehensive review of the business by the Webcentral Board, which engaged Macquarie Capital. The deal is structured as a joint venture with a new Australian-based company. Webcentral will retain a one-third equity interest through an investment in the parent company based in Luxembourg. The remaining two-thirds equity interest will be held by Oakley Capital and its partners.

Oakley Capital, a mid-market private equity firm with approximately €10 billion in assets under management, will be collaborating with hosting industry veterans, Jochen Berger and Tom Strohe, known for their successful ventures in the hosting sector.

The $165 million transaction comprises cash proceeds of $115 million, a one-third equity interest in the Domains Business valued at $20 million, and a deferred revenue balance of $30 million that will not be deducted from the purchase price. Additionally, the Domains Business will continue to source cloud services and managed support services from Webcentral, under a services agreement valued at $12 million over five years, with a minimum of $4 million in the first year.

Upon completion of the transaction, Webcentral will undergo a name change to 5G Networks Limited, focusing on its telecommunications carrier and infrastructure ownership businesses. The 5GN business will manage data centres, private cloud services, fibre optic cables, and provide managed IT services to 2,500 enterprise clients and 100 wholesale customers, with expected pro forma revenue of $45 million in FY24 and a pro forma net profit of over $5 million before acquisitions.

The pro forma net cash position of Webcentral after the transaction will be approximately $84 million, representing around $0.25 per share, with $115 million in expected total cash proceeds, $31 million in debt repayment, and $5 million in transaction costs.

Webcentral plans to allocate the remaining proceeds from the transaction for EBITDA-accretive acquisitions in complementary technology, cloud hosting, and managed IT businesses, and to support future growth initiatives. The Webcentral Board will also review the company’s capital management strategy post-completion, including the possibility of resuming dividends to shareholders and share buybacks.

The completion of the transaction is expected by late November 2023, subject to certain conditions, including the Lux Company’s subsidiaries entering into binding debt facility agreements, the absence of material adverse changes, and the successful completion of an internal restructure. 

In FY23, Webcentral witnessed strong organic revenue growth across the Company’s customer segments delivering $96.1 million, a 2.9% increase on the previous year to generate $8 million in positive operating cash flow.